Eyes on Freddie's $6 Billion Stock Sale

Freddie Mac's planned sale of $6 billion in special stock to help shore up its battered finances will be closely watched by investors gauging the damage inflicted by the turmoil this year in the credit and housing markets.

The nation's No. 2 buyer and guarantor of home loans said Tuesday it was slicing its quarterly dividend in half, to 25 cents, and selling $6 billion of preferred stock as it anticipates additional losses from mortgages gone sour. It was Freddie Mac's first dividend cut since it became a public company in 1989 and is expected to reduce its expenses by as much as $646 million a year.

The money raised from the stock sale will be used to buttress the company's balance sheet "in light of actual and anticipated losses," government-sponsored Freddie Mac said in a statement.

Lenders, investors and consumers may continue to question the financial health of Freddie Mac and its bigger government-sponsored competitor, Fannie Mae . After the staggering third-quarter losses disclosed this month by the two companies -- a record $2 billion for Freddie Mac -- their image as stalwarts of the mortgage industry has frayed.

Fannie Mae and Freddie Mac have traditionally been a major source of funding for banks and other mortgage lenders by buying up mortgages they make and then bundling them as securities for sale to investors. Industry experts say a reduced role by either company could ripple across the housing market.

Shares of McLean, Va.-based Freddie Mac have tumbled by about 30 percent since Nov. 20, when it announced its bigger-than-expected quarterly loss and talked of a potential reduction in its dividend payout. They gained $1.23 Tuesday to close at $25.73, compared with around $60 last month.

The company's announcement came after the close of trading. Freddie Mac shares fell 47 cents to $25.26 after-hours.

"If Freddie Mac thought they could weather the storm and avoid selling preferred stock at a possible 'bargain basement' price, they would not be facing this impending sale," said Walter O'Haire, senior analyst at Celent, a financial research and consulting firm based in Boston.

"This will be an interesting offering to await," O'Haire said in an e-mail, noting that its pricing terms will be closely watched. "If the offering is viewed as a relative bargain, a strong level of interest may signal much-needed investor confidence in the (housing) sector."

Management of the stock offering is being led by Lehman Brothers and Goldman Sachs , the Wall Street firms recently hired by Freddie Mac as financial advisers to help it explore possible new ways of raising capital.

Freddie Mac said only a small portion, which it did not specify, of the $6 billion in securities it is selling is convertible to common stock -- which dilutes the value of outstanding shares and could further depress the company's gutted stock price. Those securities are convertible at any time, at the holder's option.

The company's board declared a dividend of 25 cents for the fourth quarter, compared with 50 cents in the third quarter. Freddie Mac said it needed the dividend cut to hold on to enough cash to maintain its financial flexibility and satisfy federal regulators.

In 2004, following a multibillion-dollar accounting scandal, Freddie Mac agreed with its regulator, the Office of Federal Housing Enterprise Oversight, to keep an extra 30 percent cushion of cash to cover potential losses.

The Loss

The sale of preferred stock and the halving of the dividend were expected after Freddie Mac last week posted the July-September $2 billion loss, its biggest quarterly deficit ever, and warned that it may need to curtail its business unless it can raise fresh capital. The loss, due in large part because Freddie needed to set aside $1.2 billion to account for bad home loans, far outstripped what Wall Street was expecting.

If sales of securities, the dividend cut and other actions aren't sufficient to keep the company's capital levels above government-mandated minimums, Freddie Mac said it may consider other measures such as limiting its growth, reducing the size of its mortgage investment holdings or issuing new stock.

The news sent a shudder through the mortgage market since Freddie's loss was even larger than the $1.4 billion quarterly deficit reported earlier this month by Fannie Mae.

Analysts noted that Freddie Mac's holdings of securities backed by high-risk subprime mortgages -- the loans targeted to borrowers with tarnished credit records that succumbed to a wave of defaults starting earlier this year -- greatly exceed those of Fannie Mae.

The remedies Freddie Mac is undertaking could add to the strain on the slumping housing market, analysts say, an outcome that would be sharply at odds with its government-mandated mission to keep money flowing to lenders.